VIETNAM - All that glitters is not gold

by lexie Sun Dec 04, 2011 10:50 am

December 4, 2011

All that glitters is not gold

If the end can justify the means, the State Bank of Vietnam (SBV) is choosing the right course in consolidating its control over the gold market by petitioning the Government to impose State monopoly in gold processing and trading. In a draft decree already submitted to the Government for approval, the central bank sets tough conditions for those bullion traders who want to maintain manufacturing and trading in the industry. Provisions in the draft decree, in effect, will confine gold bar manufacturing to Saigon Jewelry Co. (SJC) only, while the number of gold traders will also be slashed from thousands now to dozens.

The tough stance by the central bank is viewed by experts as necessary to restore order on the local gold market which in the past few weeks has seen repeated chaotic trading attributed to speculation. The local gold price has in several occasions shot up to levels far higher than the global price, prompting SBV to take costly remedial measures by allowing for gold imports amounting to dozens of tons. Such fluctuations on the gold market have also rattled the financial market and cut deep into the country’s foreign reserves.

SBV explains that restoring order on the gold market will contribute to macro-economic stability, which is now the goal of utmost importance for the country. The intended goal is undisputable.

Despite the general attitude of approval from experts and even market players, the central bank’s move towards the so-called stabilization has stirred up public annoyances, according to local media. There are widespread concerns over the side-effects of the imminent gold policy, from losses to gold buyers and economic damages to bullion traders to the possibility of ‘black-market’ trading rearing its head that may get out of the central bank’s hand.

In his answers to queries from National Assembly deputies in Hanoi last week, the central bank’s governor Nguyen Van Binh asserted that SBV “will tighten control over gold manufacturing and trading towards the goal of State monopoly,” Tuoi Tre reports.

The governor made it clear that SJC, which currently holds the lion’s share of 90% on the local gold market, will be made a brand under the direct management of the central bank, and in the future, this brand may be transformed into the SBV brand. Other gold manufacturers and traders need to sacrifice their own benefits for the sake of the national interest, according to the paper.

Before any concrete, positive results can be achieved, the local market has witnessed fluctuations harmful to both the public and enterprises.

Many people who have previously purchased gold of brands other than SJC have rushed to offload their holdings for fear that their assets will not be tradable once the decree comes out, and prices of such gold brands have tumbled compared to SJC gold though they are of same quality, according to Nguoi Lao Dong. The price margin has even widened to about VND1 million a tael, meaning huge losses for gold owners.

Gold enterprises also voice their grievances over the central bank’s steps, as they are suffering a lot from stagnant business while pending the decree. Apart from SJC as the biggest manufacturer, the country is also home to seven others, most of them having stopped gold manufacturing, according to Vnexpress. Furthermore, says the online newspaper, these enterprises have spent huge sums importing machinery for gold manufacturing and processing, and thus will incur big losses if they are disallowed to continue manufacturing.

Enterprises have also spent a lot building their brands for gold bars, and if they have to cease gold bar production, it will be a waste of resources, says Vietnamnet. Even in the case of SJC, its brand is worth a lot, and if it is to be replaced by the new brand of SBV, the waste is tremendous.

There are also possible risks to SBV itself in pursuing the State monopoly.

As the number of gold selling points will likely be curtailed to dozens of authorized traders and their branches only, it will be difficult to meet the public demand, says Vietnamnet. Meanwhile, some 10,000 existing gold shops across the country will not easily quit their business, giving way to the recurrence of the black market seen during the time of the centrally-planned economy, which will be very difficult to curb. The news website judges that controlling the gold market then will be much tougher than dealing with the dollar market now due to the much bigger public demand for gold compared to the greenback.

Once the central bank assumes State monopoly over gold manufacturing, it will also have to assume all risks arising from this business, says Sai Gon Tiep Thi. And in the end, if SBV is not good at risk management, all gold business activities including import and export will create a huge burden for the people as end-consumers of the precious asset.

Nguyen Van Thuan, dean of the Finance-Banking Faculty of the HCMC Open University, says on Vnexpress that the State monopoly as envisioned by the central bank will distort the market. Meanwhile, Vu Thanh Tu Anh, the director of research at the Fulbright Economic Teaching Program, is quoted as saying on this news website that “the draft decree bears the non-market characteristics.”

The central bank’s intention to control the gold market might be a big contribution to macro stability, and might prevent the market from upheavals. But a second thought should be given so as to satisfactorily address all the numerous side-effects. Otherwise, even if the policy turns out to be a big success, all that glitters is not gold.

http://www.vietfinancenews.com/2011/12/all-that-glitters-is-not-gold.html